China Textile Safeguard Process Effect

The US textile industry should extend its trade strategy beyond the China textile safeguard and use all available trade remedies.

William C. Sjoberg and Carlos Moore

T he National Council of Textile Organizations (NCTO), Washington, and the National Textile
Association (NTA), Boston, among others, recently filed a number of textile safeguard petitions on
imports of textiles and apparel from China. In filing the petitions, the US textile and fiber
industry hopes to contain the growth of imports from China that will result from the
soon-to-be-eliminated quotas administered under the World Trade Organization's (WTO's) multilateral
Agreement on Textiles and Clothing (ATC).

Should the US government acknowledge China's proven ability to rapidly respond to quota
elimination and support a finding of a threat of market disruption - one of the alternative legal
standards required for the imposition of quotas under the textile safeguard - the issue then
becomes whether the quotas will be sufficient to protect the US industry's market share or whether
the China-specific quotas must be combined with other types of trade remedies to effectively stave
off the upcoming surge in textile and apparel imports.

For no less than the last 40 years, US imports of textiles and apparel have been subject to
import quotas imposed by a series of quota agreements sanctioned by the General Agreement on
Tariffs and Trade and, more recently, by the WTO. Those agreements have been known, at various
times, as the Long-Term Arrangement Regarding International Trade in Cotton Textiles, the
Multi-Fiber Arrangement and the ATC. Pursuant to the ATC, all quotas are scheduled to expire Dec.
31, 2004, and, beginning in 2005, textile and apparel markets of WTO-member countries will be open
to competition from other WTO members. Thus, to the extent the US textile industry has not
yet begun to revise its trade strategy in light of the overall impact of this event, it should now
consider as a top priority actions to curb imports using US trade laws.

The ATC required that trade in textiles become quota-free over a 10-year period. In January
2002, the United States removed 13 quotas on cotton, wool and man-made products in compliance with
the ATC. Since then, US imports of those products originating in China have flooded the US
market, increasing by more than 1,000 percent in four years
(See Figure 1).

The rapid increase in imports from China has led the domestic textile industry to file
petitions before the ATC quotas actually expire, and to base those petitions on a threat of market
disruption. The effectiveness of these textile-specific safeguard petitions depends on when the
petition is filed and whether the US government is willing to establish a quota based on threat of
market disruption. Because only one of those factors is within the petitioners' control, it is in
the petitioners' best interest to seek strategies that curb disruptive imports for as long as
possible, and at the lowest possible import levels.

As demonstrated in Examples 1 and 2, the level and duration of the quota depends on when the
Committee for the Implementation of Textile Agreements (CITA) receives a safeguard petition.

If CITA receives a petition at a time other than the fourth calendar quarter of the year,
any quotas imposed on China-origin textiles will be in effect only from the date CITA
requests consultations with China to the end of the calendar year
(See Example 1). For example, if a petition is filed on January 1, and CITA makes an
affirmative determination of market disruption or threat thereof, the resulting quota will be
effective only from mid-April through December 31, or for approximately 258 days, rather than the
entire year. After little more than eight months of quota protection, the petitioners will
have to refile their petition, and CITA will have to reassess the issue of market disruption or
threat thereof.

However, if CITA receives a petition in the fourth calendar quarter of the year, any quotas
imposed on China-origin textiles will be effective for one year from the date that CITA requests
consultations with China
(See Example 2). For example, if a petition is filed on October 1, and CITA makes an
affirmative determination of market disruption or threat thereof, the resulting quota will be
effective as early as January 17 of the following year, and will remain in effect for 365 days.
Nevertheless, after that one year of protection, the petitioners will still have to refile their
petition, and CITA will still have to reassess the issue of market disruption or threat
thereof.

In Example 2, unless the petitioner files a petition for a new quota before the end of the
quota year, any subsequent quota will apply only for the partial year described in Example 1. Such
early filing will likely have to be based on an allegation of a threat of market disruption if the
imports in question have been under quota for the previous 12 months.

As set forth in both examples, quotas imposed under the textile and apparel safeguard are
calculated by increasing the quantity of imports entering the United States during the first 12
months of the most recent 14 months by 7.5 percent. In a usual case, that increase may not appear
to be significant. However, there is no prescribed date by which CITA is required to publish its
Federal Register notice to accept the request for an action under the textile and apparel safeguard
and to seek public comment. In addition, CITA may extend certain deadlines, for example, the
comment period. Thus, importers may accelerate shipments of imports during the interim period in
which quotas are not imposed - the period between the end of the quota period and the time in which
quotas are reimposed - to establish a greater base to which the 7.5-percent increase is applied.
Any delay beyond two months could significantly increase the quota level because the quota formula
considers the first 12 months of the most recent 14 months of data.

Example 3 demonstrates three possible scenarios associated with the textile-specific
safeguard:
• The red dashed line sets forth a three-year import history based on
shipments by China, completely unencumbered by quotas, increasing at a rate of 50 percent per
annum. Considering the rapid increase in Chinese shipments of products freed from quotas in
2002, a 50-percent increase is a reasonable assumption.
• The blue dotted line sets forth a three-year quota history based on three
consecutive determinations of affirmative market disruption. The domestic industry waits and
gathers two months of quota-free import data (assumed to increase at a rate of 50 percent per
annum) on which to base its allegations of market disruption. This pattern continues through the
end of 2008.
• The green solid line sets forth a three-year quota history based on
three consecutive determinations of affirmative threat of market disruption. Proving threat of
market disruption year after year, when the data on which the threat will be based are imports
under quota, may be increasingly difficult unless the US government decides to implement the
safeguard aggressively.

To summarize, assuming that US imports of textiles from China will increase at a rate of 50
percent per annum when unencumbered by quotas, the impact of the safeguard on the US textile
industry will vary widely under the three above-referenced scenarios.

Without doubt, the safeguard provision slows the flood of Chinese shipments significantly -
if CITA moves aggressively. The difference in import growth between a quota based on threat
of market disruption and a quota based on actual market disruption also is significant: 24-percent
growth versus 59-percent growth, respectively. Thus, the extent to which the textile-specific
safeguard can be an effective, strategic tool will depend upon when the safeguard petition is
filed, the reaction time of CITA, and the ability of the Chinese textile and apparel industries to
flood the US market during periods when quotas are not in effect.

Other factors to consider in evaluating a company's or industry segment's trade strategy
are: whether China historically met its quotas for the particular product (indicating a potential
for a future surge once quotas are removed); whether a short-term solution - quotas extending for
most or possibly only part of the four-year life of the China textile-specific safeguard - is the
answer to maintaining market share; and whether Chinese imports pose the only substantial threat to
a company or industry, or whether other major exporting countries - Pakistan, India, and/or Vietnam
- pose a similar threat.

To the extent US companies or industry segments are competing with exports from such
countries, effective protection can be achieved only by combining a China textile safeguard with
additional trade remedies. For example, a countervailing duty petition targeting India's heavily
subsidized textile industry or an antidumping petition targeting Pakistan's well-known strategy of
pricing its fabric to ensure the resulting apparel that is produced in the Caribbean will be
competitive with apparel produced entering the United States under the Caribbean Basin Trade
Partnership Act may be needed to be effective in slowing disruptive imports.

Remember, the US government has been, at times, reticent to support the US textile industry
aggressively. For example, the United States has allowed the textile and apparel quotas to be
eliminated despite the recent efforts by many developing countries to implement new WTO procedures
to ease the transition once quotas are eliminated. It also has failed to initiate a Section 301
petition advocating US government action to obtain a revaluation of China's currency. Consequently,
the US textile industry should extend its trade strategy beyond the China textile safeguard and use
all available trade remedies, especially those with little US government discretion, against those
countries that threaten to dominate and disrupt textile and apparel trade in a quota-free world.

Editor’s Note: William C. Sjoberg is an attorney with the Washington-based law firm of Adduci,
Mastriani & Schaumberg LLP. Carlos Moore is president of AM&S Trade Services LLC,
Washington.